Understanding the Impact of IT-Capital on Strategy

Information technology is often considered as yet another functional-level strategy, which need to be in step with your company’s business strategy. This approach does not recognise information technology’s potential breakthrough capacity nor does it capitalise on its coordination capacity. In the desire to democratise the understanding of strategy throughout your company it is important to recognise and realise the effects of information technology on your strategy.

technology

There are 3 questions which need to be answered:

  1. What is the SCOPE of your competitive resource base?
  2. How do you ideally MAXIMISE your economic potential?
  3. What is the EFFECT of information technology on your economic potential?

SCOPE

In asking the question of the SCOPE of your competitive resource base you are analysing where your key assets are valuable. Are your assets valuable in a relatively small set of markets/contexts (i.e. user-, use-, or usage-specific) or are these assets able to reduce cost and/or increase revenues in a wide variety of contexts. So-called narrowly valuable assets are, for example, specialised (manufacturing) operations or research and development whereas broadly valuable assets are relational and organisational capital (reputation, brand, customer or supplier relations, or organisational culture).

MAXIMISE

The ideal way to capture value is quite different when dealing with either narrowly or broadly valuable assets.

In general , a company with narrowly valuable assets would be best off focusing on only those activities where these assets are most valuable; other activities are ideally outside the company’s boundaries (i.e. low vertical integration, and low diversification). In contrast, a company with broadly valuable assets would be best off deploying its firm-specific but usage-flexible assets across vertically integrated and diversified businesses.

However, the ideally focusing narrowly valuable asset company will often need to make compromises like vertical integration (e.g. securing demand) in order to defend its highly specific investments. Transaction cost economics argues specific investments are more liable to opportunism because these investment cannot be utilised elsewhere. Also, broadly valuable asset companies will find themselves limited in their reach to extend to a wide variety of economic contexts. As such these companies are also limited in their ability to realise the economic potential of their assets. This brings us to the role of information technology in strategy.

EFFECT

Information technology capital can facilitate narrowly valuable asset companies to focus through the so-called electronic brokerage effect (Open EDI, electronic market places, and supply chain management systems). This effect provides the ability to better search, monitor, and control. Barney and others demonstrate that the presence of IT capital on these types of companies indeed lead to lower levels of vertical integration and diversification (i.e. more focus).

Through the so-called electronic integration effect of information technology (e.g. ERP systems, proprietary information systems) broadly valuable assets companies are enabled to leverage their assets vertically and across different product categories (e.g. enterprise-wide platforms to enable companies to deploy their brand or customer base). Again, research demonstrates that the presence of IT capital on these types of companies indeed lead to higher levels of vertical integration and diversification (i.e. better reach).

Conclusion: The right match between the type of IT capital (brokerage effect vs. integration effect) and the type of assets (narrowly valuable vs. broadly valuable) increases performance.

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